Study Shows Half of Art Donations Overvalued

(March 10, 2008) Half of all art donations audited over the last 20 years by the Internal Revenue Service (IRS) have been appraised at nearly double their actual value, according to a recent article by The Los Angeles Times.

The IRS checks only a few tax returns every year that claim deductions related to gifts of art. In 2004, IRS appraisers checked just seven of the more than 100,000 returns with donations of art, according to the article (“Inflated art appraisals cost U.S. government untold millions,” March 2, 2008). However, more than one-third of the 184 objects claimed on those returns were overvalued by an average of more than three times their actual worth.

Almost $1 billion annually is deducted by donors of art when preparing their tax returns. IRS reviews have caught $183 million in inflated valuations, though a recent report by the agency’s inspector general suggests that the problem is far more widespread.

Examining a statistical sample, the inspector general predicted that there would have been at least 200 exaggerated appraisals in 2002. But the IRS found only four that year with the limited number of resources it had available. However, the same study suggested that checking more art donations would not be cost-effective because they only make up less than four percent of all charitable contributions.

Sen. Charles Grassley (R-Iowa), who requested the study, is considering new legislation that would require all art donations of a certain value to be checked by the panel, according to the article.

Congress passed a law in 2006 that tightened standards on valuations by lowering the threshold on what is considered an “exaggerated” appraisal, from 200 percent overvalue to 150 percent overvalue. The law also increased oversight of and fines for appraisers.